FILED DEC 6 2024
ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
In re: BAP No. NV-24-1102-LFB SOLIMANO FRAMING GROUP LLC, Debtor. Bk. No. 24-10079-abl SOLIMANO FRAMING GROUP LLC, Appellant, v. OPINION PIER CONSTRUCTION & DEVELOPMENT, LLC, Appellee.
Appeal from the United States Bankruptcy Court for the District of Nevada August Burdette Landis, Chief Bankruptcy Judge, Presiding
APPEARANCES Matthew C. Zirzow of Larson & Zirzow LLC argued for appellant; Joseph Went of Holland & Hart LLP argued for appellee.
Before: LAFFERTY, FARIS, and BARASH, ∗ Bankruptcy Judges.
LAFFERTY, Bankruptcy Judge:
∗ Hon. Martin R. Barash, United States Bankruptcy Judge for the Central District
of California, sitting by designation. 1 INTRODUCTION
After Solimano Framing Group LLC (“Debtor”) filed its chapter 11 1
subchapter V petition, it proposed a plan of reorganization through which
Debtor sought to assume several contracts, including a number of contracts
with Pier Construction & Development, LLC (“Pier”). Debtor referred to
these contracts as executory both in the plan and its filed schedules,
implying that Debtor had the power to assume them.
Contrary to Debtor’s assertions, six of the contracts identified by
Debtor had been terminated by Pier prior to the petition date.
Unfortunately, given Debtor’s misrepresentations concerning the status of
the contracts and Debtor’s associated nondisclosures, the bankruptcy court
remained unaware of this fact and confirmed the plan.
One day after confirmation of Debtor’s plan, Pier timely asserted an
approximately $500,000 claim against the estate in accordance with the
deadline set by the bankruptcy court in the claims bar order. Subsequently,
Pier filed an amendment reducing its claim to $0 based on Pier’s setoff and
recoupment rights. Debtor objected, arguing that the plan, by operation of
the doctrine of claim preclusion, 2 precluded Pier’s claim. The bankruptcy
1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532, and “Rule” references are to the Federal Rules of Bankruptcy Procedure. 2 Although the parties use the term “res judicata” in their briefs, the preferred
term is “claim preclusion.” Syverson v. Int'l Bus. Machs. Corp., 472 F.3d 1072, 1078 n.8 (9th Cir. 2007). 2 court disagreed, holding that Debtor could not assume contracts that were
terminated prepetition, concluding that claim preclusion did not apply to
the facts of this case, and otherwise allowing Pier’s claim as amended.
We AFFIRM. We publish to explain that, even in an expedited
proceeding under subchapter V, bedrock principles of due process require
adequate, comprehensible, and consistent notice of plan provisions that
affect creditors’ rights.
FACTS 3
Debtor operates a construction business that specializes in metal and
wood stud framing, drywall and wall finishings, and painting. Prepetition,
Pier, a general contractor, entered into eight subcontracting agreements
with Debtor with respect to four different construction projects. Through
these subcontract agreements, Debtor agreed to provide drywall and
painting services on the specified projects.
In December 2023, Pier terminated six of its eight subcontracts with
Debtor for cause (the “Terminated Subcontracts”).4 Pier did not terminate
the two remaining subcontracts. Weeks later, on January 9, 2024, Debtor
3 We have taken judicial notice of the bankruptcy court docket and various documents filed through the electronic docketing system. See O'Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1989); Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). 4 As further discussed below, Debtor now contends that the bankruptcy court
should have analyzed whether the Terminated Subcontracts were effectively and irrefutably terminated. However, Debtor did not raise this issue before the bankruptcy court, and there are no facts in the record or applicable law in the briefs that would lead this Panel to conclude that the Terminated Subcontracts were anything but terminated. 3 filed its chapter 11 subchapter V petition. Upon Debtor’s filing, the court
set a deadline of March 19, 2024, for creditors to file proofs of claim.
Although Debtor did not identify Pier as a creditor in either its
petition or its schedules, Pier concedes that it had actual notice of Debtor’s
bankruptcy filing. However, in its schedule G, Debtor listed all of its
subcontracts with Pier, including the Terminated Subcontracts, as
executory and unexpired contracts, subject to assumption or rejection.
Debtor did not disclose anywhere in its schedules or statements that most
of its subcontracts with Pier had been terminated prepetition, or even
indicate that there was a potential dispute about the status of the contracts,
instead representing to the court and its creditors that all of its subcontracts
with Pier were executory.
Less than one month after the petition date, Debtor filed its chapter
11 subchapter V plan of reorganization (the “Plan”). In the Plan, Debtor did
not propose to treat Pier as a separately classified creditor. With respect to
executory contracts, the Plan provided:
The Debtor assumes all executory contracts and unexpired leases as of the Effective Date listed on Exhibit 4. All other executory contracts and unexpired leases shall be deemed to be rejected as of the Effective Date. A proof of a claim arising from the rejection of an executory contract or unexpired lease must be filed no later than 30 days after the date of the order confirming this Plan, or it will be forever barred. The Confirmation Order shall constitute an order approving the assumptions and rejections herein pursuant to § 365 of the Code, and as of the Effective Date. The Debtor reserves the
4 right to amend this exhibit to add or subtract executory contracts and unexpired leases through the date of the confirmation hearing on the Plan. Plan, Article 6 (emphases in the Plan). In Exhibit 4 of the Plan, Debtor listed
all of its subcontracts with Pier (among several other contracts), including
the Terminated Subcontracts. Debtor also asserted that the amount
required to cure any default under its subcontracts with Pier (and the other
listed contracts) was $0. As with its schedules and statements, Debtor did
not disclose anywhere in the Plan that six of the listed subcontracts Debtor
purported to assume had been terminated prepetition.
The Plan also reiterated the court’s previously set claims bar date of
March 19, 2024, and provided that “Allowed” claims would include claims
that had been “timely filed by the Bar Date.” Plan, Article 8.01. Aside from
specifying that creditors could file claims until the March 19 bar date, the
Plan also provided that the bankruptcy court would retain jurisdiction to,
among other things, “hear and determine any objections to the allowance
of claims.” Plan, Article 8.08.
Shortly after Debtor filed the Plan, the bankruptcy court entered an
order setting procedures related to confirmation of the Plan (the
“Procedures Order”). The Procedures Order required that objections to
confirmation be filed no later than March 8, 2024, and set a confirmation
hearing on March 18, 2024, i.e., prior to the deadline for creditors to file
proofs of claim.
5 Pier did not object to confirmation of the Plan. On March 18, 2024, the
bankruptcy court held the confirmation hearing and issued an oral ruling
confirming the Plan.
One day later, Pier timely filed its proof of claim. In its original claim,
Pier asserted a $499,429.04 unsecured claim against Debtor based on
“contract termination.” As far as the Panel can tell from the record, Pier’s
post-confirmation proof of claim was the first filing before the bankruptcy
court that revealed that most of Debtor’s subcontracts with Pier had been
terminated. 5
Debtor promptly filed an objection to Pier’s claim, arguing that the
claim was time-barred under the Procedures Order and that the Plan
precluded Pier from asserting a claim because the Plan provided for a cure
amount of $0.
Subsequently, Pier filed an amended proof of claim that reduced the
amount of its asserted claim to $0. In an attachment to the amended proof
of claim, Pier explained that the reduction was based on application of
recoupment in the amount of $347,174.06 and setoff in the amount of
$152,254.98. On the same day, Pier filed a response to Debtor’s objection to
its claim, asserting that Debtor did not have the ability to assume the
5 Concurrently, Pier filed a motion for relief from the automatic stay to, among other things, apply recoupment and setoff to mutually owed debts. Debtor and Pier later stipulated for relief from the automatic stay allowing Pier to exercise its setoff and recoupment rights. 6 Terminated Subcontracts and that, in any event, the Plan did not preclude
Pier from employing setoff or recoupment to adjust its claim.
The bankruptcy court held a hearing on Debtor’s objection to Pier’s
claim. Thereafter, the bankruptcy court issued an oral ruling allowing
Pier’s claim as adjusted. The court held that Debtor did not defeat the
prima facie validity of Pier’s proof of claim. Specifically, the court was not
persuaded that the doctrine of claim preclusion barred Pier from filing a
claim when Debtor did not disclose in the Plan that the Terminated
Subcontracts had been terminated prepetition. The court also held that
Pier’s claim was timely because it was filed by the claims bar date, and the
Procedures Order did not alter that deadline. Finally, the court held that,
even if Debtor defeated the prima facie validity of Pier’s claim, Pier
ultimately satisfied its burden of persuading the bankruptcy court that it is
entitled to a general unsecured claim against which Pier was able to
exercise its rights of recoupment and setoff. Debtor timely appealed.6
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A) and (B). We have jurisdiction over the bankruptcy court’s
determination under 28 U.S.C. § 158.
6 Ordinarily, a debtor would not complain about a creditor’s reduction of the creditor’s own claim to zero. But Debtor wished to recover the amounts that Pier had owed to Debtor but had set off or recouped against its claims against Debtor, and Debtor believed that the court’s order allowing Pier’s claim in a zero amount would effectively approve the setoff and recoupment. 7 ISSUE
Did the bankruptcy court err in allowing Pier’s claim against the
estate?
STANDARDS OF REVIEW
A bankruptcy court’s order allowing or disallowing a proof of claim
is reviewed for abuse of discretion. Burlington N. R.R. Co. v. Dant & Russell,
Inc. (In re Dant & Russell, Inc.), 853 F.2d 700, 707 (9th Cir. 1988); Bitters v.
Networks Elec. Corp. (In re Networks Elec. Corp.), 195 B.R. 92, 96 (9th Cir. BAP
1996). A bankruptcy court abuses its discretion if it applies the wrong legal
standard or its findings are illogical, implausible or without support in the
record. TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011).
“We review the bankruptcy court’s findings of fact for clear error; we
review its conclusions of law de novo.” Adinolfi v. Meyer (In re Adinolfi), 543
B.R. 612, 614 (9th Cir. BAP 2016) (internal quotation and citation omitted).
“Whether a person’s due process rights have been violated is a mixed
question of law and fact, which is reviewed de novo.” Hasso v. Mozsgai (In
re La Sierra Fin. Servs., Inc.), 290 B.R. 718, 726 (9th Cir. BAP 2002). Under a
de novo review, “we look at the matter anew, giving no deference to the
bankruptcy court’s determinations.” Barnes v. Belice (In re Belice), 461 B.R.
564, 572 (9th Cir. BAP 2011) (quoting Charlie Y., Inc. v. Carey (In re Carey),
446 B.R. 384, 389 (9th Cir. BAP 2011)).
8 We may affirm on any basis supported by the record. Caviata Attached
Homes, LLC v. U.S. Bank, N.A. (In re Caviata Attached Homes, LLC), 481 B.R.
34, 44 (9th Cir. BAP 2012).
DISCUSSION
The crux of Debtor’s argument on appeal is that the confirmed Plan
precluded Pier from asserting a claim. This argument depends on the
dubious assertions that a chapter 11 debtor-in-possession, which owes
fiduciary obligations to the estate, may: (i) falsely identify the Terminated
Subcontracts as executory contracts in its sworn schedules; (ii) list the
Terminated Subcontracts as executory contracts in the Plan; (iii) propose to
“assume” the Terminated Subcontracts and “cure” any default without
disclosing that the agreements were terminated prepetition; (iv) fail to
notify Pier or the court that Debtor not only intended to assume executory
contracts but also, contrary to the Code, revive terminated contracts;
(v) request confirmation of the Plan containing these false statements and
material omissions, without offering any evidence that the contracts were
executory or that the cure amounts were zero; and (vi) subsequently use
the Plan as a cudgel against Pier’s timely filed proof of claim.7
7 It is well established that contracts that were terminated prepetition may not be assumed in bankruptcy. “If a contract has been terminated pre-bankruptcy, there is nothing left for the debtor to assume.” Moody v. Amoco Oil Co., 734 F.2d 1200, 1212 (7th Cir. 1984). Contracts that are terminated prepetition also are not property of the estate. Id. at 1213 (“Section 541 ‘is not intended to expand the debtor’s rights against others more than they exist at the commencement of the case.’”) (quoting H.R. Rep. 95-595, at
9 We fervently disagree. As discussed below, the facts of this case
foreclose application of the doctrine of claim preclusion for several reasons,
including that such application would run afoul of Pier’s due process
rights. We discern no error in the bankruptcy court’s decision to allow
Pier’s claim notwithstanding Debtor’s assertion that certain ambiguous
language in the Plan precluded the claim.
A. Application of claim preclusion in this case would violate Pier’s due process rights. An order confirming a bankruptcy plan is “binding on all parties and
all questions that could have been raised pertaining to the plan are entitled
367 (1977)). On appeal, Debtor argues that the bankruptcy court should have analyzed whether the Terminated Subcontracts were “irrefutably” terminated. However, a party “who fails to timely raise an issue in the bankruptcy court cannot raise it on appeal.” Res. Funding, Inc. v. Pac. Cont’l Bank (In re Wash. Coast I, L.L.C.), 485 B.R. 393, 411 (9th Cir. BAP 2012). In its briefing and oral argument before the bankruptcy court, Debtor never asserted that the Terminated Subcontracts were not validly terminated, or that they were executory, or that there was any legal basis to revive the Terminated Subcontracts. Accordingly, after reviewing the record before it, which included Pier’s prepetition notices of termination, the bankruptcy court explicitly found that the Terminated Subcontracts had been terminated weeks before Debtor filed its petition. As a result, Debtor may not raise this issue for the first time on appeal. Even if the Panel were to consider Debtor’s arguments regarding the validity of the terminations, both the record and Debtor’s briefs are devoid of any reason to hold that the bankruptcy court’s finding regarding the prepetition terminations was clear error. Debtor only states in its briefs that, occasionally, terminated contracts may be revived based on state law, such as where the contracts contain anti-forfeiture provisions or when a termination is interpreted as an anticipatory repudiation. However, Debtor does not provide any application of this law to the facts of this case. Consequently, there is no reason for this Panel to question the bankruptcy court’s finding that the Terminated Subcontracts were completely terminated prepetition. 10 to res judicata effect.” Trulis v. Barton, 107 F.3d 685, 691 (9th Cir. 1995).
Generally, “‘[i]f a creditor fails to protect its interests by timely objecting to
a plan or appealing the confirmation order,’ the creditor is foreclosed from
challenging any of the plan’s provisions, ‘even if such a provision is
inconsistent with the Code.’” Miller v. United States, 363 F.3d 999, 1004 (9th
Cir. 2004) (quoting Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 193
F.3d 1083, 1086 (9th Cir. 1999)).
Nevertheless, “[t]his general proposition is subject to some major
limitations.” Cnty. of Ventura Tax Collector v. Brawders (In re Brawders), 325
B.R. 405, 411 (9th Cir. BAP 2005), aff'd, 503 F.3d 856 (9th Cir. 2007). One
such limitation is the due process rights of parties impacted by a plan of
reorganization. See id. Courts do not apply the doctrine of claim preclusion
where application of the doctrine would violate a party’s due process
rights. Id.
Due process requires “notice reasonably calculated, under all the
circumstances, to apprise interested parties of the pendency of the action
and afford them an opportunity to present their objections.” Mullane v.
Cent. Hanover Bank & Tr. Co., 339 U.S. 306, 314 (1950) (citations omitted).
“The notice must be of such nature as reasonably to convey the required
information. . . .” Id. (citations omitted).
Very recently, the Ninth Circuit stressed that chapter 11 debtors-in-
possession must be clear and explicit in matters that impact creditors’
rights. Munding v. Masingale (In re Masingale), 108 F.4th 1195 (9th Cir. 2024).
11 In Masingale, the debtors filed schedules indicating that they were
exempting 100% of the fair market value of their real property. Id. at 1198.
Under the Code, unless a party in interest timely objects to a debtor’s
claimed exemption, the property claimed as exempt becomes exempt. Id. at
1197 (citing § 522(l)). A party in interest did not timely object to the debtors’
claimed exemption. Id. at 1198.
However, before the deadline to object expired, the debtors filed a
chapter 11 plan and disclosure statement and made several representations
in both documents that they would only retain the exemptions allowed by
law and not exceeding any statutory cap. Id. at 1198-99. The bankruptcy
court eventually confirmed the debtors’ plan. Id. at 1199.
Subsequently, the debtors’ case was converted to a chapter 7
liquidation. Id. When the chapter 7 trustee sought to sell the debtors’ real
property, the debtors objected on the basis that they had claimed 100% of
the fair market value of the property as exempt. Id. at 1199-1200. The
bankruptcy court disagreed with the debtor, allowing an exemption only in
the amount of the statutory maximum. Id. This Panel reversed the
bankruptcy court, holding that two Supreme Court decisions indicated that
a debtor’s scheduled exemptions were dispositive once the deadline to
object expired without any objection to the exemption, even if the claimed
exemption improperly exceeded the statutory cap. Id. (citing Taylor v.
Freeland & Kronz, 503 U.S. 638 (1992); Schwab v. Reilly, 560 U.S. 770 (2010)).
12 The Ninth Circuit disagreed. Id. at 1208. Although the Ninth Circuit
acknowledged that uncontested exemptions generally are dispositive, the
Circuit held that Taylor and Schwab did not apply where the debtors made
conflicting representations in their schedules, on the one hand, and the
plan and disclosure statement, on the other hand. Id. at 1205. The
conflicting representations did not establish the “type of ‘clear’ above-limit
exemption or ‘warning flag[]’ that required a make-it-or-lose-it
objection . . . .” Id. (quoting Schwab, 560 U.S. at 789).
In reaching this conclusion, the Ninth Circuit placed great weight on
the fact that the debtors “were serving as debtors-in-possession and owed
attendant fiduciary obligations to their creditors.” Id. In such cases,
“precedent does not suggest that we should endorse what happened here”
by allowing debtors to make unclear, contradictory statements “and then
capitalizing on the lack of any objection.” Id. at 1207; see also J.J. Re-Bar Corp.
v. United States (In re J.J. Re-Bar Corp.), 420 B.R. 496, 506 (9th Cir. BAP 2009)
(plan did not provide adequate notice to creditor where language in plan
was “too ‘cute’” and “too cryptic” and any “lack of clarity appropriately”
fell on the debtor that drafted the plan), aff'd, 644 F.3d 952 (9th Cir. 2011).
Prior to Masingale, the Ninth Circuit also had repeatedly stressed that,
for claim preclusion to apply to a confirmed plan, the language in the plan
impacting a party’s rights must be clear and unambiguous. See Miller, 363
F.3d at 1006 (language in chapter 11 plan that provided for discharge of
nondischargeable debts was “insufficiently clear to warrant overriding the
13 interpretive rule that statutory rights can be waived only by an explicit
statement”); Enewally v. Wash. Mut. Bank (In re Enewally), 368 F.3d 1165,
1173 (9th Cir. 2004) (holding that a ”confirmed plan has no preclusive effect
on issues that . . . were not sufficiently evidenced in a plan to provide
adequate notice to the creditor” and that a contrary holding would allow
stripping of rights “by ambush”); Brady v. Andrew (In re Com. W. Fin. Corp.),
761 F.2d 1329, 1337 (9th Cir. 1985) (notice inadequate where disclosure
statement included substantive arguments regarding ability to avoid
investors’ interests, but statement did not clearly warn investors that by
voting for the plan they would relinquish their security interests).
In line with these authorities, this Panel also has confirmed that
notice is inadequate, and thus claim preclusion does not apply, where a
plan is not clear enough to inform an impacted party that its rights are
being impacted. In re Brawders, 325 B.R. at 413; Varela v. Dynamic Brokers,
Inc. (In re Dynamic Brokers, Inc.), 293 B.R. 489 (9th Cir. BAP 2003). As aptly
explained in Brawders:
[A] plan should clearly state its intended effect on a given issue. Where it fails to do so it may have no res judicata effect for a variety of reasons: any ambiguity is interpreted against the debtor, any ambiguity may also reflect that the court that originally confirmed the plan did not make any final determination of the matter at issue, and claim preclusion generally does not apply to a “claim” that was not within the parties’ expectations of what was being litigated, nor where it would be plainly inconsistent with the fair and equitable implementation of a statutory or constitutional scheme.
14 In re Brawders, 325 B.R. at 411.
For instance, in Dynamic Brokers, the chapter 11 debtor-in-possession
scheduled a creditor’s claim without qualification, such that it was deemed
allowed and creditor did not need to file its own claim. In re Dynamic
Brokers, Inc., 293 B.R. at 492. After the claims bar date, the debtor proposed
a plan that dramatically reduced the amount of the creditor’s claim. Id.
The bankruptcy court confirmed the plan over the creditor’s oral
objection, noting that the creditor had failed to timely submit a written
objection to the plan. Id. at 493. Separately, the court also sustained debtor’s
objection to the creditor’s filed claim. Id. On appeal, this Panel reversed
both the order confirming the plan and the order sustaining debtor’s
objection to the creditor’s claim. Id. at 492.
In concluding that the debtor failed to provide adequate notice to the
creditor, the Panel first noted that “there is no rule that authorizes an
objection to claim to be litigated in chapter 11 confirmation proceedings
without complying with Rule 3007.” 8 Id. at 496. The Panel was careful to
note that it was “not hold[ing] that a plan can never be used to object to a
claim of a creditor who does not actually consent to such an objection . . . .”
Id. at 497. However, any objection through a chapter 11 plan would have to
comply with “the essence of Rule 3007” to ensure protection of creditors’
due process rights. Id.
8 Rule 3007 sets forth the procedural requirements for objecting to a claim. 15 [U]tilizing a plan confirmation proceeding as a method of objecting to a claim presents troubling policy issues in the face of rules of procedure that appear to require formal objections to claims. The construct of the statute and rules that is held out to the public is that claims are deemed allowed unless there is an objection in accordance with rules that prescribe a precise procedure for objecting. Neither the statute nor the rules say, “oh, by the way, we can also sandbag you by sneaking an objection into a reorganization plan and hoping you do not realize that we can use this device to circumvent the claim objection procedure mandated by the rules.” That is not the law, and if it were the law, it would be a material disservice to public confidence in the integrity of the bankruptcy system. Id.
In light of the above, the Panel held “that considerations of due
process mandate great caution and require that the creditor receive specific
notice (not buried in a disclosure statement or plan provision) of at least
the quality of specificity, and be afforded the same opportunity to litigate
one-on-one, as would be provided with a straightforward claim objection
under Rule 3007.” Id.; see also Century Indem. Co. v. Nat’l Gypsum Co.
Settlement Tr. (In re Nat’l Gypsum Co.), 208 F.3d 498 (5th Cir. 2000)
(aggregating cases and requiring strict adherence to § 365 and Rules 6006
and 9014 when debtors assume executory contracts via a plan).
The basic gist of the authorities above can be distilled to the
following: a confirmed plan will not preclude parties from subsequently
asserting their rights unless specific language in the plan clearly and
unambiguously disposed of those rights.
16 Here, Debtor asserts that including the Terminated Subcontracts in
an exhibit to the Plan that listed a total of 42 purportedly executory
contracts qualified as adequate notice to Pier. Pursuant to the ample
authorities above, we disagree. Debtor’s mere inclusion of the Terminated
Subcontracts in an exhibit to the Plan, without further explanation or
disclosure, was insufficient to provide adequate notice to Pier about the
impact of the Plan on Pier’s rights.
Significant to this conclusion is that the Plan did not simply propose
assumption of a contract and cure of a default. Because the Terminated
Subcontracts were terminated before the petition date, what the Plan
actually proposed was resuscitation of terminated agreements and, as a
result, the creation of an interest the estate did not have and the imposition
of obligations on a third party that no longer existed.9 Given the
extraordinary alteration of Pier’s rights sought by the Plan, the boilerplate
language regarding assumption of executory contracts and a reference to
an exhibit identifying the Terminated Subcontracts, without any
disclosures regarding the prepetition terminations or any discussion
regarding Debtor’s ability to unilaterally revive such agreements, was
woefully inadequate.10
9 We take no position on whether the Plan, Procedures Order, and other notices served by Debtor would have been adequate if there was no dispute that the subject contracts were executory. 10 We acknowledge that, in subchapter V cases, debtors are not required to file
disclosure statements in connection with a plan of reorganization. § 1181(b). However,
17 Contrary to the Ninth Circuit’s demand for clarity, the Plan was far
from clear and unambiguous regarding its impact on Pier’s rights. As to
this point, the Ninth Circuit’s decision in Masingale is instructive. Without
explicit, clear disclosure by Debtor that it intended to revive the
Terminated Subcontracts, Pier could have interpreted the Plan as only
allowing assumption of the subcontracts Debtor had the ability to assume,
i.e., the two subcontracts Pier did not terminate. A party in Pier’s shoes
would have no reason to believe that its claim based on the Terminated
Subcontracts would be governed by the clause related to executory
contracts instead of the clauses related to the treatment and allowance of
claims. Debtor, a chapter 11 debtor-in-possession with “attendant fiduciary
obligations” like the debtors in Masingale, cannot obfuscate the effect of the
nothing in the statutory scheme governing subchapter V cases allows for the inclusion of false statements and material omissions in the debtor’s schedules and statements, or permits proposal of plans that run afoul of other provisions of the Code. Subchapter V debtors, like other chapter 11 debtors, are still required to propose a plan “in good faith and not by any means forbidden by law,” and to ensure that the plan “complies with the applicable provisions of” the Code. § 1129(a)(1), (a)(3). In addition, the shortened deadlines in subchapter V cases often lead to expedited procedures and dispositions. This is evident in this case, where Debtor filed its petition, proposed a plan, and had that plan confirmed in the span of approximately two months. In such cases, it is extra important to be mindful of preserving parties’ due process rights. Finally, we note that the streamlined procedures of subchapter V do not supplant the basic principle that the proponent of a plan has the burden of proving that the court should confirm the plan and grant the other requested relief. In re Zaleha, 162 B.R. 309, 313 (Bankr. D. Idaho 1993). Debtor offered no evidence that any of the plan confirmation requirements were met, that any of the assumed contracts were in fact executory, or that the cure amount under any of those contracts was zero. 18 Plan and then “capitaliz[e] on the lack of any objection.” Masingale, 108
F.4th at 1205, 1207.
Equally without merit is Debtor’s suggestion that the Procedures
Order somehow barred Pier from filing a proof of claim after the deadline
to object to confirmation, as opposed to the applicable claims bar date. The
Procedures Order simply provided a deadline by which objections to
confirmation of the Plan must be filed. Although the Procedures Order did
explicitly state that the deadline applied to “objections to the assumption or
rejection of any executory contracts or unexpired leases and/or alleged cure
claims relating to the same,” neither the Procedures Order nor any other
notice provided by Debtor explicitly categorized the Terminated
Subcontracts as executory contracts or otherwise disclosed Debtor’s
intention to revive the Terminated Subcontracts.
Consequently, nothing in the Procedures Order served to adequately
signal to Pier that the applicable deadline to protect its rights – which from
Pier’s perspective required only the filing of a proof of claim – was the
deadline related to executory contracts as opposed to the deadline to file a
claim, which Pier timely did. Once again, Masingale forecloses reliance on
this type of contradictory messaging.
In addition, under Dynamic Brokers and National Gypsum, Pier was
entitled to the same procedural safeguards it would have received had
Debtor filed a motion to assume the Terminated Subcontracts under § 365.
Had Debtor filed a motion, Debtor would have had to comply with Rule
19 6006, including the Rule’s requirements that all executory contracts to be
assumed under the same pleading be between the same parties and that
Debtor specify the terms for each requested assumption. Rule 6006(e), (f).
Debtor’s lumping of 42 agreements with several nondebtor parties in one
exhibit that lacked disclosure of pertinent terms related to each agreement
would not have satisfied this procedure. Instead of taking “great caution”
to ensure that Pier received “specific notice” of the Plan’s impact on Pier’s
rights, Debtor “buried” relevant information in an exhibit to the Plan and,
more importantly, entirely failed to disclose pertinent information at all. In
re Dynamic Brokers, 293 B.R. at 497. This is precisely the type of
“sandbagging” the Panel cautioned against in Dynamic Brokers. Id.
For all the foregoing reasons, application of claim preclusion in this
case would violate Pier’s due process rights and, as a result, the bankruptcy
court correctly refused application of the doctrine.
B. Even if Debtor did not violate Pier’s due process rights, the Plan would not preclude Pier from filing a claim. Claim preclusion prohibits relitigation of “any claims that were
raised or could have been raised” in a prior action between the same
parties or their privies. Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d 708,
713 (9th Cir. 2001). Application of the doctrine requires: (1) an identity of
claims; (2) a final judgment on the merits; and (3) the same parties or
privity between parties. Id.
20 Here, the first two elements of the doctrine give us pause. First, it can
hardly be said that the Plan’s proposed cure amount, for the purpose of
assuming an executory agreement and continuing a contractual
relationship, is identical to a determination regarding the validity and
amount of a creditor’s unsecured claim based on a prepetition
termination.11 While cure amounts set in a confirmed plan may preclude
allowance of a creditor’s claim in certain situations, here, the concept of a
“cure” is entirely irrelevant to the claim asserted by Pier. Given Pier’s
prepetition termination, there was nothing to “assume” and nothing to
“cure,” rendering any analysis of the amount necessary to assume an
executory contract under § 365 immaterial to the court’s analysis of the
allowance and validity of Pier’s claim.
Second, the only portion of the Plan that relates to the current dispute
between the parties is the portion that reserved the bankruptcy court’s
jurisdiction to adjudicate claims allowance post-confirmation. “It is well
established that ‘res judicata does not apply when a cause of action has
been expressly reserved for later adjudication.’” Kmart Corp. v. Intercraft Co.
(In re Kmart Corp.), 310 B.R. 107, 119 (Bankr. N.D. Ill. 2004) (quoting D & K
Props. Crystal Lake v. Mut. Life Ins. Co. of N.Y., 112 F.3d 257, 259-60 (7th Cir.
1997)). Plans routinely reserve claims allowance litigation as a post-
confirmation matter; otherwise, debtors would “have to adjudicate every
Of course, the great irony in this case is that both Debtor’s proposed cure 11
amount and Pier’s net asserted claim are for the same amount – zero dollars. 21 claim to finality prior to plan confirmation” and significantly delay plan
confirmation. Id. at 119-20 (citing Amarex, Inc. v. Marathon Oil Co. (In re
Amarex, Inc.), 74 B.R. 378, 380 (Bankr. W.D. Okla. 1987), aff'd, 88 B.R. 362
(W.D. Okla. 1988)). This reservation is especially important in subchapter V
cases, like this one, because subchapter V “by its very nature is intended to
be an expedited process.” In re Seven Stars on the Hudson Corp., 618 B.R. 333,
340 (Bankr. S.D. Fla. 2020).
Here, the court explicitly refrained from finally adjudicating the
allowance of claims via the Plan, such that the confirmation order would
not qualify as a final judgment on the merits of Pier’s claim. Pursuant to the
claims allowance procedures set forth in the Plan and the previously set
claims bar date, Pier properly and timely filed its proof of claim on the
claims bar date. The bankruptcy court appropriately adjudicated the
allowance of Pier’s claim without regard to the inapplicable “cure”
amounts in the exhibit to the Plan. We detect no error in the bankruptcy
court’s decision not to apply the doctrine of claim preclusion.
C. Law of the case. “Under the law of the case doctrine, a court is barred from
reconsidering an issue that already has been decided in the same court or
in a higher court in the same case.” FDIC v. Kipperman (In re Com. Money
Ctr., Inc.), 392 B.R. 814, 832 (9th Cir. BAP 2008) (citing Milgard Tempering,
Inc. v. Selas Corp. of Am., 902 F.2d 703, 715 (9th Cir. 1990)). “For the law of
22 the case doctrine to apply, the issue must have been decided, either
expressly or by necessary implication.” Id.
“However, even if the law of the case doctrine applies, a court may
decide, in its discretion, to revisit the issue if: ‘(1) the first decision was
clearly erroneous and would result in manifest injustice; (2) an intervening
change in the law has occurred; or (3) the evidence on remand [is]
substantially different.’” Id. at 832-33 (quoting Milgard Tempering, Inc., 902
F.2d at 715).
Debtor did not raise its law of the case argument before the
bankruptcy court. Consequently, Debtor is barred from raising this issue
on appeal. See In re Wash. Coast I, L.L.C., 485 B.R. at 411.
Nevertheless, for the very same reasons discussed above, the issues
related to allowance of Pier’s claim were not decided, either expressly or by
necessary implication, in connection with plan confirmation. In addition,
the law of the case doctrine provides courts the flexibility to decline use of
the doctrine where a manifest injustice would occur. Given the serious due
process implications discussed above that foreclose application of claim
preclusion, Debtor similarly cannot rely on the law of the case doctrine.
D. Debtor has not set forth any other error in the bankruptcy court’s ruling allowing Pier’s claim. As Debtor acknowledges in its brief, the Ninth Circuit Court of
Appeals has explicitly held that creditors’ right to setoff under § 553 takes
precedence over § 1141 and, as a result, confirmation of a plan does not
23 impact a creditor’s right to setoff. Carolco Television Inc. v. Nat’l Broad. Co.
(In re De Laurentiis Ent. Grp. Inc.), 963 F.2d 1269, 1277 (9th Cir. 1992).
Nevertheless, in its brief, Debtor contends that appellee’s setoff and
recoupment claims did not survive plan confirmation.
Debtor’s theory is again dependent on a holding that the Plan’s
purported “assumption” and “cure” preclude Pier from asserting setoff
and recoupment. For the same reasons discussed above, the Plan’s
language regarding executory contracts is no more preclusive to Pier’s
recoupment and setoff theories as it is to Pier’s assertion of a claim.
Debtor’s references to certain out-of-circuit authorities also are
inapposite. United States v. Cont’l Airlines (In re Cont’l Airlines), 134 F.3d 536
(3d Cir. 1998); Daewoo Int'l (Am.) Corp. Creditor Tr. v. SSTS Am. Corp., No.
02 CIV. 9629 (NRB), 2003 WL 21355214, at *4-5 (S.D.N.Y. June 11, 2003). In
Continental Airlines, the Third Circuit distinguished De Laurentiis by noting
that the creditor in De Laurentiis timely filed a proof of claim whereas the
creditor in Continental Airlines did not. Cont’l Airlines, 134 F.3d at 541. Here,
as discussed above, Pier timely filed a proof of claim, and the Plan
contemplated that claims allowance and adjustment would occur after
confirmation.
We are equally unpersuaded by Daewoo. There, the chapter 11 plan
contained a specific prohibition against assertion of setoff claims against
the debtor or the trust established by the plan. Daewoo Int’l (Am.) Corp.
24 Creditor Tr., 2003 WL 21355214, at *4. Here, the Plan does not contain any
such specific prohibition.
Debtor has not provided a legitimate reason to stray from the holding
in De Laurentiis. In addition, Debtor does not articulate any other reason
why the bankruptcy court erred in allowing Pier’s claim as reduced based
on Pier’s setoff and recoupment calculations.
CONCLUSION
The bankruptcy court did not err in allowing Pier’s claim. We
therefore AFFIRM.